7. The Concept of Coordination in Austrian Macroeconomics

CHAPTER 7

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The Concept of Coordination in Austrian Macroeconomics¹

In the conclusion of his paper, Roger Garrison suggests that the concept of coordination “can serve as the organizing principle” in a unified macroeconomics, just as it now “provides the macroeconomic foundation for macroeconomics.” It is specifically the Austrian concept of intertemporal coordination that Garrison offers as the “organizing theme” to reconstruct and unify the currently compartmentalized standard theories of macroeconomics, growth, and business cycles.

In view of the importance which Garrison and other modern Austrian economists assign to the notion of coordination, it is important to clarify the meaning and uses of the concept. The focus of Garrison’s paper is on the usefulness of intertemporal coordination as a device for broadening standard macroeconomics to encompass both the Keynesian and Austrian visions of the market forces at work at various levels of resource idleness. As Garrison uses the term, intertemporal coordination refers to the market forces which lead entrepreneurs to construct and maintain an integrated time structure of investment activities which corresponds to the intertemporal consumption preferences, or “time preferences,” expressed by market participants. I intend to focus on the broader concept of what may be termed “price coordination,” which encompasses intertemporal coordination and which I maintain is the starting point of the uniquely Austrian approach to macroeconomic theory.

Price coordination must not be confused with plan coordination, a concept originally formulated by Friedrich von Hayek. In his article “Economics and Knowledge,” which has heavily influenced modern Austrian writers, Hayek suggested a concept of equilibrium based on “coordination of plans”² as a substitute for the concept of equilibrium based on “constancy of the data.” In contrast, price coordination, as I elaborate the concept below, is the indispensable complement to the concept of an evenly rotating economy based on constant data. As Ludwig von Mises has repeatedly emphasized, the evenly rotating economy, although an imaginary state which can never be realized in the unfolding of the historical market process, is yet indispensable to the identification and analysis of the entrepreneurial function of the real world.³ Entrepreneurs, however, can formulate and execute production plans only in a world in which economic calculation is possible, that is, in which catallactic competition generates market-clearing prices which, at every moment of calendar time and without fail, reflect, promote, and coordinate those uses of the available scarce resources that are expected to be the most highly valued by consumers. Price coordination, therefore, is not a phenomenon associated with an unrealizable state of equilibrium, however the latter is conceived; rather, price coordination is the essential characteristic of the plain state of rest, which, as Mises tells us, “… is not an imaginary construction but the adequate description of what happens again and again on every market.”⁴

The concept of price coordination emerges out of a particular view of the market process, which is most fully developed in the works of William H. Hutt,⁵ Mises,⁶ Phillip H. Wicksteed,⁷ and economists of the American psychological school, especially Herbert J. Davenport.⁸

According to these economists, the market is to be understood as a social appraisement process,⁹ in which the money prices for the economy’s available means of production are determined in light of their importance for achieving the ends of the economic system, that is, consumer preferences.¹⁰ As Mises’s contribution to the socialist calculation debate has taught us, price appraisement of the means of production is the specifically social function of the market, because, in the absence of prices determined by the competitive bidding of entrepreneurs for stocks of privately owned resources, economic calculation and, therefore, rational allocation of resources under the social division of labor are impossible.¹¹

In analyzing the social appraisement process, we find that it is inherently entrepreneurial, competitive, and coordinative. Let us consider these qualities each in turn.

Since all production processes take time to complete, and are therefore oriented to an uncertain future, any act of production undertaken for the market presupposes entrepreneurial bidding for productive inputs based on a speculative appraisement of the price of the planned output. In forecasting future market conditions, the entrepreneur has only his experience and his understanding to rely upon.¹² His starting point is his experience of the present (actually immediately past) structure of market prices and of the pattern of the economic data engendering this structure. Based on this experience, the entrepreneur employs his faculty of understanding to forecast the successive changes that will occur in the qualitative economic data over the course of the contemplated production period and to appraise the future structure of quantitative price ratios that will be determined by these estimated data changes.

It is thus clear that production decisions cannot be made based only on knowledge of realized, and therefore past, market prices. As shapers of future-oriented production processes, entrepreneurs require detailed information about the qualitative or nonprice data to fulfill their dynamic function as forecasters and future price appraisers.

Hutt, in particular, recognizes the importance of entrepreneurial forecasting and appraisement to the production process, emphasizing that, “[P]roduction … is the response to the forecast expression of economic ends.… Entrepreneurial decision-making is dominated by perpetual forecasting. [Unless otherwise noted, all emphases are those of the author cited.]”¹³

Hutt also understands the crucial role that detailed information about past configurations of the qualitative economic data play in entrepreneurial forecasting, arguing that “… the crucial decisions are made in the light of detailed as well as generalized knowledge …‘planning’ under free enterprise is … deliberate, purposeful and based upon detailed, specialized, local knowledge of means to ends, as well as careful observation of ends themselves.”¹⁴ In the same vein, Hutt favorably cites Wicksteed’s emphasis on what he calls “the ‘planning aspect’ of business management, that is, the conscious purposive actions of those entrepreneurs who can be aware of the detailed facts about changing ends and means.”¹⁵

Mises, too, stresses the importance of detailed nonprice information for the formulation of business forecasts, stating that: “No businessman may safely neglect any available source of information. Thus no businessman can refuse to pay close attention to newspaper reports.”¹⁶ Indeed, for Mises, the accuracy of a judgment regarding the future state of the market depends upon a close reading of many details of catallactic experience, and, therefore, the entrepreneur “…takes information about the past state of affairs from experts in the fields of law, statistics, and technology.…”¹⁷

Finally, Wicksteed makes the point that even after a stock of goods has been produced and lies in inventory ready to be sold at the dawn of a new market day, the producer cannot mechanically extrapolate today’s equilibrium price from the price in yesterday’s market, but must make a speculative appraisement of today’s price based on detailed information regarding existing market conditions. Using the example of a country market, Wicksteed writes:

… the stall-keepers will form a general estimate, based partly on actual inspection of the market, partly on a variety of sources of information and grounds of conjecture which they commanded before entering it, as to the amount, say, of some particular fruit and the most obvious substitutes for it that are in the market that day. And further, they will form an estimate, based on the experiences of previous days or years, of the equilibrium price corresponding to that amount.…

An interesting indication that the seller is thus guided in naming the price by a series of inferences and speculations as to the ultimate facts that must determine it, is to be found in the circumstance that a seller cannot always answer the question what the price is. It often happens in small country markets that when a customer asks the price of something early in the day the stallkeeper will answer that she does not know. She feels herself unequal to forming an intelligent estimate of the amount of stock in the market, the scale of preferences of possible purchasers, and the resultant price which will ultimately reign.¹⁸

In the Wicksteedian account of the price equilibration process, then, sellers actively seek the detailed information needed to formulate appraisements of the prospective equilibrium price. This account of the process contrasts with the account given by those who view the price system as a device for economizing on information, in which it is held that sellers, innocent of knowledge of the underlying economic data, revise their expectations and plans in passive response to the surpluses and shortages associated with realized market prices.

It is thus clear that, in contrast, for example, to Friedrich von Hayek¹⁹ and Israel M. Kirzner,²⁰ the social appraisement economists cited above do not view the discovery of knowledge as the social outcome of competition but as its necessary precondition. That is, before the commencement of the competitive process in which entrepreneurs bid against one another to acquire the scarce resources needed to carry out future-oriented production plans, it is necessary for each participant in the process to already have obtained information regarding what Wicksteed, in the quotation above, refers to as “the ultimate facts.” The “discovery” of such nonprice knowledge pertaining to past and future states of the market underlies and conditions entrepreneurial appraisement of future output prices and, therefore, the resulting catallactic competition for productive resources. Hence, the knowledge discovery process must be characterized as the nonsocial prerequisite for competition, since it depends crucially on the exercise of interpretive understanding by individual human minds.

The outcome of competition, on the other hand, is the price appraisement of the factors of production and the concomitant creation of a unified price structure, in which goods and services of every type and order are assigned a cardinal number that can be meaningfully employed in the processes of economic calculation. The market’s price structure thus may be termed a “social” phenomenon, because, although it is generated by the mental operations of every member of society in his dual role as consumer and producer, it remains impossible to replicate by an process operative within the individual human mind.²¹

We come at last to the concept of coordination and its relationship to the social appraisement process. The coordinative functioning of this process has received the most explicit treatment in the works of Hutt.²²

In Hutt’s view, the price structure established by the social appraisement process coordinates, at every moment of time, the multitude of resource uses and combinations and integrates them into a unitary structure of production designed and tending to optimally serve consumer preferences. This result is insured by the fact that the prices bid by entrepreneurs for inputs into their planned production processes are necessarily adjusted to their appraisements of the future prices of the outputs expected to emerge from these processes. Thus, the prices of all resources, including all orders of intermediate or capital goods, are ultimately coordinated with the expected prices of consumer goods and therefore with consumer preferences. According to Hutt, therefore, the pricing process is “… the process through which the heterogeneous economic aims which people are seeking are brought into consistency, and through which a synchronized cooperation in response to those aims is achieved.”²³

The market-clearing nature of these prices insures at the same time that entrepreneurial production plans are carried out with full utilization of scarce resources, since the price that clears each resource market represents the resource’s expected marginal revenue product in the production structure. Under these circumstances, the only resources that remain unutilized by entrepreneurs are those which have no value, for example, submarginal land, or those whose direct use to the resource owner yields a higher utility than that yielded by its marginal revenue product, which is the case, for example, when an individual chooses leisure over his most preferred employment opportunity. Of course, an individual who, under a regime of market-clearing prices, is currently without a job but actively seeking work, is not idle in the economic sense but is self-employed in what Hutt calls “job prospecting.”²⁴ In rejecting known employment opportunities at prevailing wage rates in favor of exploring for a more remunerative opportunity, this individual “… is really investing in himself by working on his own account without immediate remuneration.”²⁵

Hutt describes the importance of market-clearing prices to the coordinative functioning of the social appraisement process in the following terms:

If the rate of production of any particular final commodity is perfectly coordinated with the system as a whole, the market price will be such that consumers are able and willing to buy the full flow coming forward.… If, at any stage, the price of a material or intermediate product is reduced, the rate of flow at that stage will, ceteris paribus, tend to increase because, demand remaining the same, final output is likely to increase; and if the price is raised, the rate of flow will tend to decline.… It follows that the rate of flow of directly consumed services and work in progress, through all the stages of production and into consumption as final products, is determined by the prices asked being fixed at market-clearing levels.… But if every particular price is adjusted to all other current and expected prices, and provided services offered are not for any reason valueless, the rate of flow of any one needed thing can be synchronized, through pricing, with the rates of flow of all complementary things.… For unless services are valueless there must be a demand for them and, in the absence of restraint, the potential products into which they are embodied will move through the stages of production toward and into consumption.

When prices are coordinatively determined, then, not only are final prices fixed in relation to money income and consumer preference, but the prices of services and intermediate products at all stages of production are fixed in relation to expectations of demand at the next stage. Prospective prices at the next stage of demand are in turn derived from predictions of demand at subsequent stages, including the ultimate demand for the final product.²⁶

The importance of entrepreneurial forecasting to the social appraisement process thus cannot be overstated. But what if production plans are based on forecasts and price appraisements which are proved false by market conditions as they subsequently emerge (which is frequently the case in the real world)? Is discoordination and “involuntary” unemployment of valuable resources not the result of such entrepreneurial error? The answer is “no”; the social appraisement process is at every point in time and under all circumstances effectively coordinating as long as price flexibility is maintained. The social appraisement of resources which is embodied in the structure of market-clearing prices, in fact, always reflects the speculative judgments of entrepreneurs regarding a pattern of consumer preferences that is of necessity temporally remote. The inevitable imperfection of entrepreneurial understanding of the future which results, ex post, in the misappraisement of resources, to use Hutt’s words “… does not explain non-use of valuable (i.e., potentially demanded) services. It explains wrong-use.”²⁷

Even in the face of the most grievous errors of entrepreneurial forecasting, full employment and effective coordination of scarce productive resources are insured by the market-clearing prices that result when access to markets for all participants in the social division of labor is unobstructed by the threat of legal or illegal coercion. As Hutt remarks: “What is essential in a coordinated economy is the right of access to markets for all resources and services; and in a money economy, this requires pricing to satisfy both buyer and seller. ‘Markets’ can be ‘assured’ for producers as a whole in no other way.”²⁸

Indeed, it is the losses that emerge when resources are priced to fully reflect erroneous forecasts which are the most accurate indicator to entrepreneurs of the direction in which their expectations need to be revised. Thus, Hutt emphasizes “… the importance of the principle that the path to the creation of justified entrepreneurial expectations is wage-rates (and other prices constituting costs) which are sensitively adjusted to entrepreneurial forecasts, however unjustifiably pessimistic those forecasts may happen to be at the outset.”²⁹

The ex post discovery by some entrepreneurs that their courses of action have led to pecuniary losses therefore does not impede coordination. To the contrary, the experience of losses, if they are expected to continue to result from present resource combinations, stimulates a revision of entrepreneurial forecasts, production plans, and bids for productive inputs, leading to a restructuring of price relationships among higher-order goods. The full and coordinated employment of productive resources then continues uninterrupted on the basis of this revised, but still speculative, social appraisement.

Nor is the coordinative functioning of the appraisement process obstructed in the slightest by the existence of contractually fixed prices for inputs or outputs which, it may turn out, are negotiated on the basis of mistaken expectations. Such prices, as Hutt emphasizes, do not constitute rigid market prices that distort the allocation of resources.³⁰ In fact, in the instant after they are contractually established, prices governing future transactions lose the character and function of market prices and begin to operate merely as terms upon which speculative gains and losses resulting from fluctuations of spot prices are distributed between buyers and sellers in the structure of production, for example, laborers and employers, materials suppliers and materials users, retailers and wholesalers, and so on.

Perhaps the most widespread and persistent doubt concerning the coordinative capacity of the social appraisement process, expressed even in the writings of some Austrian economists, arises from a consideration of the effects of a rise in the liquidity preferences of the public.³¹ According to the conventional view, the process by which the purchasing power of the monetary unit rises in response to an attempt by market participants to increase their cash balances can involve serious discoordination of economic activity, including “involuntary” unemployment of resources.³² Those who propound this view, however, never come to grips with the crucial point made by Hutt that the structure of resource prices generated by the social appraisement process is determined in light of the full set of consumer preferences.³³ As a subset of consumer preferences, therefore, liquidity and time preferences do not stand athwart the appraisement process, as is frequently supposed, but help to give it direction and meaning. The fact that competitive bidding for productive resources in every stage of the production structure is ultimately limited by the height of expected money prices for consumer goods, in conjunction with the aggregate flow of saved funds into the hands of entrepreneurs insures that the overall scale and interstage relationships of resource prices are jointly and naturally adjusted to liquidity and time preferences.

Thus, to the extent that an increase in the cash-balance demand for money is anticipated beforehand by entrepreneurs, there will arise a potentially discoordinating divergence between the spot and (expected) future values of money, creating what Hutt refers to as “unstable price rigidities.”³⁴ Present input prices will momentarily exceed forecast output prices, thereby rendering production at present rates unprofitable. However, those entrepreneurs who perceive the intertemporal divergence in the value of money will immediately react by lowering their current bids for resources and investing in speculative cash balances.

Such speculative “hoarding” will precipitate a reduction in current input prices and will continue until these prices have been fully coordinated with entrepreneurial appraisements of future output prices. Far from disrupting the coordinative functioning of the social appraisement process, changes in the demand for money due to speculative motives are indispensable for maintaining price coordination in the face of discrepancies between the spot and future values of money, which continually recur in a world in which agents are unequally endowed with entrepreneurial foresight.

As long as market-clearing prices prevail in resource markets, then, the economy remains fully coordinated during the adjustment to a change in liquidity preferences. This is not to deny that an upsurge in quits, layoffs, and even business bankruptcies may occur during the process as a result of the refusal of laborers who do not foresee the imminent increase in the value of money to accept lowered nominal wage rates. Nonetheless, such an occurrence is not evidence of nonuse of valuable resources attributable to a coordination failure; rather, it represents—what in retrospect is revealed to be— an uneconomic diversion of resources to job prospecting as a consequence of entrepreneurial error in forecasting the effects of a change in liquidity preferences. Such forecasting errors and resulting resource misallocations, of course, are not specifically associated with changes in liquidity preferences, but are part and parcel of the process of adjustment to any alteration in consumer preferences.

To convince ourselves of the hardiness of the coordinative forces of the market’s appraisement process, let us now consider the adjustment to a change in the demand for cash balances under much less favorable conditions. Let us assume that both entrepreneurs and resource-owners are caught totally unawares by the change and that each entrepreneur misinterprets the decline in his selling price as evidence of a permanent reduction in the relative demand for his product. Reasoning from these unrealistic assumptions, most economists conclude that an increase in liquidity preferences among the public, if not fully offset by a timely injection of new money into the economy, is likely to cause discoordination of economic activity that results in a more or less prolonged slump in employment and real output.

Thus, for example, in discussing the effects of an unanticipated increase in the demand for money on the part of wage earners which is unmatched by an increase in the supply of money, George Selgin writes:

Businesses’ nominal revenues become deficient relative to outlays for factors of production—the difference representing money that wage earners have withdrawn from circulation. Since each entrepreneur notices a deficiency of his own revenues only, without perceiving it as a mere prelude to a general fall in prices including factor prices, he views the falling off of demand for his product as symbolizing (at least in part) a lasting decline in the profitability of his particular line of business. If all entrepreneurs reduce their output, the result is a general downturn, which ends only once a general fall in prices raises the real supply of money to its desired level.³⁵

Granting Selgin’s dubious assumptions that entrepreneurs are inexplicably unable to forecast changes emanating from the money side of the economy and, then, when such changes do occur, routinely misinterpret the variations in expenditure and revenue flows which accompany them, it still can be demonstrated that the social appraisement process is capable of maintaining a full and coordinated use of scarce resources as it adjusts to an increase in liquidity preferences.

The initial impact of a rise in liquidity preferences is a shrinkage of the revenues and cash balances of those firms which sell directly to the individuals who have decided to build up their inventories of cash. In response to what they mistakenly believe is a permanent decline in the relative demand for their output, these firms immediately restrict their demand for inputs. In consequence, temporary surpluses appear on labor and other resource markets at prevailing prices. Owners of land and capital resources that are specific to the production processes of the revenue-losing firms, despite their erroneous expectations of the future value of money, have no alternative but to accept market equilibrating cuts in the prices of their resources. However, things are different on the markets for nonspecific resources, such as labor. If laborers do not foresee the imminent increase in the purchasing power of money, as we assume, they refuse to acquiesce in the reduction of their nominal wage rate to a level consonant with their current employer’s forecast of their marginal revenue product, and they accordingly seek alternative employment opportunities. Thus the excess supply on the labor market initially is cleared by a reduction of supply as labor services are withdrawn from the market and diverted to self-employment in job prospecting.

These early job prospectors sooner or later discover that their best employment opportunities are with those firms whose selling prices have not yet been altered by the monetary adjustment process and which, therefore, are in a position to absorb a small amount of additional labor at nominal wage rates only slightly below previously ruling rates. As the adjustment process proceeds, however, the entrepreneurs and owners of specific resources in the industries first affected by the increase in the demand for money are eventually driven to cut their expenditures and, therefore, their demands for the products of other industries in order to arrest and reverse the depletion of their cash balances. The result is a spreading decline in product prices which further restricts entrepreneurial profit and demand on resource markets and thus induces cuts in the prices of a growing range of specific resources and encourages more laborers to invest their services in job prospecting. Thus, as time goes on, the number of firms whose selling prices have not yet been reduced in response to the increased demand for money progressively declines, while the pool of laborers actively seeking alternative employment opportunities is continually being replenished and even expanded, resulting in an increasingly rapid fall in nominal wage rates.

When the overall price structure is in the last stages of adjusting to heightened liquidity preferences, there finally occurs a reduction in the product prices of those firms which, because their selling prices have held up the longest, have undertaken the greatest expansions of their labor forces. The result is a collapse of these firms’ marginal revenue product of labor schedules and their nominal wage-rate offers. This effects a sudden reversal (disequilibrium) of wage-rate differentials, with the relatively highest wage rates now being offered by those firms that were first to experience the effects of the altered demand for money and that are now relatively undermanned. With this development, it finally becomes apparent that labor has been malinvested in job prospecting and misallocated in expanding those industries and firms whose product prices were the last to fall.

Hence it has been demonstrated that a rise in liquidity preferences which is completely unanticipated and initially misinterpreted by market participants causes the available stocks of inputs to be utilized by entrepreneurs and resource owners in productive combinations which yield a nonoptimal output mix, including, most conspicuously, an overproduction of job prospecting services. This confirms, however, the Huttian insight that, as long as resource prices clear markets and adjust to the competitive bidding of entrepreneurs, however ill-informed or egregiously myopic the latter’s expectations and appraisements, scarce means are always fully employed and coordinated with the forecast ends of the economic system. It is not the theory of coordination, therefore, but the theory of equilibration which is relevant to the question of whether entrepreneurs are predisposed to misforecasting and misinterpreting changes originating on the money side of the economy.

This analysis of the coordinative quality of the social appraisement process leads me to conclude my comment with a confirmation and reiteration of “the great praxeological truth” enunciated by Hutt:

… under competition, there is never any obstacle to the self-consistent use of scarce resources in the satisfaction of any set of noncontradictory preferences.… The origin of … “economic disturbances” [characterized by involuntary idleness of scarce resources] must be attributed … solely to the factors which prevent the value system from performing its coordinative task. For there are no economic ends, and no entrepreneurial means which are incompatible with “full employment.” Entrepreneurs will never fail to use the full flow of productive services if the price mechanism is allowed to work.…³⁶

Bibliography

Davenport, Herbert J. [1913] 1968. The Economics of Enterprise. New York: Augustus M. Kelley.

Garrison, Roger W. 1990. “Austrian Capital Theory and the Future of Macroeconomics.” Paper presented at Conference on Austrian Economics: Perspectives on the Past and Prospects for the Future, Hillsdale College, Hillsdale, Mich., April 1990.

Gunning, J. Patrick. 1989. “Mises on the Evenly Rotating Economy.” The Review of Austrian Economics 3: pp. 123–35.

Hayek, F.A. [1937] 1972. “Economics and Knowledge.” In Individualism and Economic Order. Chicago: Henry Regnery Company.

____. 1978. “Competition as a Discovery Procedure.” In New Studies in Philosophy, Politics, Economics and the History of Ideas. Chicago: University of Chicago Press.

Hutt, William H. 1963. Keynesianism-Retrospect and Prospect: A Critical Restatement of Basic Economic Principles. Chicago: Henry Regnery Company.

____. 1974. A Rehabilitation of Say’s Law. Athens, Ohio: Ohio University Press.

____. 1977. The Theory of Idle Resources: A Study in Definition, 2nd ed. Indianapolis: Liberty Press.

____. 1979. The Keynesian Episode: A Reassessment. Indianapolis: Liberty Press.

Kirzner, Israel M. 1985. “The Primacy of Entrepreneurial Discovery.” In Discovery and the Capitalist Process, pp. 15–39. Chicago: University of Chicago Press.

____. 1987. “The Economic Calculation Debate: Lessons for Austrians.” The Review of Austrian Economics 2: pp. 1–18.

Mises, Ludwig von. 1966. Human Action: A Treatise on Economics, 3rd ed. Chicago: Henry Regnery Company.

____. 1978. On the Manipulation of Money and Credit, Percy L. Greaves, Jr. ed., Bettina Bien Greaves, trans. Dobbs Ferry, N.Y.: Free Market Books.

Rothbard, Murray N. 1970. Man, Economy, and State: A Treatise on Economic Principles, 2 vols. Los Angeles: Nash Publishing.

Salerno, Joseph T. 1990a. “Ludwig von Mises as Social Rationalist.” The Review of Austrian Economics 4: pp. 26–54.

____. 1990b. “Why a Socialist Economy Is ‘Impossible.’” A postscript to Economic Calculation in the Socialist Commonwealth by Ludwig von Mises, pp. 53–71. Auburn, Ala.: Praxeology Press.

Selgin, George A. 1988. The Theory of Free Banking: Money Supply under Competitive Note Issue. Totowa, N.J.: Rowman & Littlefield.

Wicksteed, Phillip H. [1910] 1967. The Common Sense of Political Economy and Selected Papers and Reviews on Economic Theory, 2 vols. New York: Augustus M. Kelley.

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From: “The Concept of Coordination in Austrian Macroeconomics,” in Austrian Economics: Perspectives on the Past and Prospects for the Future, ed. Richard M. Ebeling (Hillsdale College Press, 1991), pp. 325–43.

¹ This is a comment on Roger Garrison (“Austrian Capital Theory and the Future of Macroeconomics,” Paper presented at Conference on Austrian Economics: Perspectives on the Past and Prospects for the Future, Hillsdale College, Hillsdale, Mich., April 1990), but can be read as a self-contained article.

² In fact, Hayek never used this term in the article, but at several places in the article referred to the “mutual compatibility” or “intercompatibility” of plans in denoting his concept.

³ For an insightful analysis and defense of Mises’s view of the nature and uses of the evenly rotating economy, see J. Patrick Gunning, “Mises on the Evenly Rotating Economy,” The Review of Austrian Economics 3: pp. 123–35.

⁴ Ludwig von Mises, Human Action: A Treatise on Economics, 3rd ed. (Chicago: Henry Regnery Company, 1966), p. 245.

⁵ William H. Hutt, Keynesianism-Retrospect and Prospect: A Critical Restatement of Basic Economic Principles (Chicago: Henry Regnery Company, 1963); idem, A Rehabilitation of Say’s Law (Athens, Ohio: Ohio University Press, 1974); idem, The Keynesian Episode (Indianapolis: Liberty Press, 1977).

⁶ Mises, Human Action.

⁷ Phillip E. Wicksteed, The Common Sense of Political Economy and Selected Papers and Reviews on Economic Theory (New York: Augustus M. Kelley, 1967).

⁸ Herbert J. Davenport, The Economics of Enterprise (New York: Augustus M. Kelley, 1968).

⁹ Mises employs the term “appraisement” in two different senses. In the first sense, it refers to a speculative judgment exercised by an individual entrepreneur. This is Mises’s use of the term when he states that “Appraisement is the anticipation of an expected fact. It aims at establishing what prices will be paid on the market for a particular commodity…” (Mises, Human Action, p. 332). The second sense in which Mises uses the term refers to a social market process. Thus Mises (Human Action, p. 333) writes, “The factors of production are appraised with regard to the prices of the products, and from this appraisement their prices emerge.” In what follows, it will be clear from the context in what sense the term is being used.

¹⁰ Following Hutt (Keynesian Episode, p. 300), I use the term “consumer preferences” to include leisure preferences, risk preferences, time preferences, and liquidity preferences.

¹¹ For review and analysis of Mises’s contribution to the socialist calculation debate, see Joseph T. Salerno, “Ludwig von Mises as Social Rationalist,” The Review of Austrian Economics 4: pp. 26–54; idem, “Why a Socialist Economy Is ‘Impossible,’” A postscript to Economic Calculation in the Socialist Commonwealth by Ludwig von Mises (Auburn, Ala.: Praxeology Press, 1990b) pp. 53–71.

¹² On the role played by experience and understanding in forecasting the uncertain future, see Mises, Human Action, pp. 112, 118, 337–38, 678.

¹³ Hutt, The Keynesian Episode, p. 300.

¹⁴ Ibid., p. 76.

¹⁵ Ibid., p. 74.

¹⁶ Ludwig von Mises, On the Manipulation of Money and Credit (Dobbs Ferry, N.Y.: Free Market Books, 1978), p. 165.

¹⁷ Mises, Human Action, p. 307.

¹⁸ Wicksteed, The Common Sense of Political Economy, p. 22.

¹⁹ Friedrich von Hayek, “Competition as a Discovery Procedure,” in Individualism and Economic Order (Chicago: Henry Regnery, 1972), pp. 179–90.

²⁰ Israel Kirzner, “The Primacy of Entrepreneurial Discovery,” in Discovery and the Capitalist Process (Chicago: University of Chicago Press, 1985) and “The Economic Calculation Debate,” The Review of Austrian Economics (1987).

²¹ The best summary and description of the social appraisement process in its competitive and entrepreneurial aspects is provided by Mises, Human Action, pp. 335–38. A remarkably similar description can be found in Davenport, Economics of Enterprise, pp. 109–13.

²² Hutt, Keynesianism; idem, A Rehabilitation of Say’s Law; and idem, The Keynesian Episode.

²³ Hutt, The Keynesian Episode, p. 151.

²⁴ Hutt, The Theory of Idle Resources: A Study in Definition, 2nd ed. (Indianapolis: Liberty Press, 1979), p. 83.

²⁵ Ibid.

²⁶ Hutt, The Keynesian Episode, pp. 137–38.

²⁷ Hutt, A Rehabilitation, p. 96 fn.

²⁸ Ibid., p. 150.

²⁹ Ibid., p. 97.

³⁰ Hutt, The Keynesian Episode, p. 144.

³¹ A rise in liquidity preference is tantamount to an increase in what Murray N. Rothbard (Man, Economy, and State: A Treatise on Economic Principles, 2 vols. [Los Angeles: Nash Publishing, 1970], p. 662) calls the “reservation demand” for money and may be loosely equated with a decline in the velocity term in the Fisherian equation of exchange. Rothbard distinguishes the reservation demand from the “exchange demand” for money, which is represented by the transactions term in the Fisherian equation.

³² One Austrian who takes this view is George A. Selgin (The Theory of Free Banking: Money Supply under Competitive Note Issue [Totowa, N.J.: Rowman & Littlefield, 1988], p. 55).

³³ Hutt, The Keynesian Episode, p. 300.

³⁴ Ibid., p. 147.

³⁵ Selgin, The Theory of Free Banking, p. 55.

³⁶ Hutt, The Keynesian Episode, p. 338.